Genesco Inc. — Q1 Fiscal 2018 10-Q
Reporting period: Three months ended April 29, 2017, compared with the three months ended April 30, 2016. Genesco operated 2,756 stores and leased departments across its footwear and Lids businesses. Results are unaudited; the company cautions that interim results are not necessarily indicative of full-year results.
Key financial results
- Sales: $643.4 million, down 0.8% year over year. Comparable sales fell 1%, comprising a 4% decline in comparable store sales and 28% growth in comparable direct sales. Excluding prior-year SureGrip sales, total sales were flat.
- Gross profit and margin: Gross profit was $318.9 million versus $329.7 million; gross margin declined to 49.6% from 50.8%. Genesco records buying, merchandising and occupancy costs in selling and administrative expenses, so its gross margin may not be directly comparable with retailers that include those costs in cost of sales.
- Operating expenses and profit: Selling and administrative expenses rose 2.5% to $316.0 million and increased to 49.1% of sales from 47.5%. Operating income fell to $2.8 million from $17.9 million; operating margin was 0.4% versus 2.8%.
- Earnings: Pretax income was $1.6 million versus $16.8 million. Continuing-operations earnings were $1.0 million versus $10.6 million; net earnings were $0.9 million versus $10.4 million. Diluted EPS was $0.05 versus $0.50. The effective tax rate was 38.3%, compared with 37.0%.
- Cash flow: Operating activities used $18.0 million, versus $18.6 million provided a year earlier. Investing used $30.1 million, including $30.3 million of capital expenditures. Financing provided $43.2 million, including $63.0 million net revolving-credit borrowings and $16.2 million of share repurchases. Cash declined $4.9 million to $43.4 million.
- Liquidity and debt: Working capital was $447.0 million. Long-term debt, including current maturities, was $138.0 million, up from $82.9 million at January 28, 2017; cash less debt was approximately $94.6 million net debt. Revolver borrowings were $109.0 million under the U.S. credit facility and $17.4 million in U.K. revolving loans; U.K. term loans were $11.7 million. Excess availability under the U.S. facility was $261.9 million. Genesco reported compliance with its U.K. covenants and was not required to meet the U.S. fixed-charge covenant at quarter-end.
- Balance sheet: Inventories were $578.1 million, up $14.4 million from January 28, 2017. Total assets were $1.479 billion and total equity was $912.9 million.
Material changes and segment performance
- Journeys: Sales decreased 3.4% to $284.1 million; operating income fell 61.9% to $7.5 million. Comparable sales declined 5%, with management citing fashion rotation, lower footwear unit sales, weaker mall traffic, lower initial product margins and limited leverage on store costs.
- Schuh: Sales rose 1.0% to $76.5 million, including a $10.2 million negative foreign-exchange impact. Comparable sales increased 10%; operating loss narrowed to $0.7 million from $2.7 million.
- Lids Sports Group: Sales decreased 1.4% to $176.9 million and results shifted from $6.0 million operating income to a $1.8 million operating loss. Management cited promotional activity, sales mix and higher compensation, marketing, benefit and depreciation costs. Comparable sales increased 1%.
- Johnston & Murphy: Sales increased 4.0% to $72.8 million, while operating income declined 21.1% to $3.8 million. Wholesale growth contributed to lower gross margin, and comparable sales declined 3%.
- Licensed Brands: Sales rose 12.0% to $33.0 million and operating income increased 22.8% to $2.3 million. The increase included delayed customer deliveries and growth in Dockers, partly offset by the sale of SureGrip in December 2016.
- Prior-year operating income included $3.6 million of impairment and other charges, versus $0.1 million in the current quarter. The much lower prior-year charge partly cushioned, but did not explain, the year-over-year decline in operating profit.
Outlook, risks and contingencies
- Management provided no specific full-year sales, earnings or EPS guidance in the supplied filing text. It expected Fiscal 2018 capital expenditures of approximately $135–$145 million, including $125–$135 million for retail and a $33 million Journeys warehouse expansion. Plans included about 20 Journeys, 35 Journeys Kidz, 5 Little Burgundy, 10 Schuh, 8 Johnston & Murphy and 24 Lids stores, plus approximately 294 major store renovations.
- Management expected cash on hand, operating cash flow and credit facilities to fund seasonal working capital, capital spending and repurchases during Fiscal 2018. It noted operating cash flow is seasonal and historically strongest in the fourth quarter. It also expected approximately $3.2 million of discontinued-operations costs to be paid over the next 12 months.
- Key disclosed risks include changing fashion and consumer demand, promotional intensity, mall traffic and online competition, store-cost leverage, supply and distribution disruptions, wholesale customer credit or bankruptcies, foreign exchange and Brexit effects, interest rates, litigation, environmental matters, and information-technology and cybersecurity disruptions.
- Environmental contingencies accrued were $4.2 million at quarter-end. A separate Gloversville settlement of $1.5 million was paid in May 2017; the insurer agreed to reimburse 75%, subject to a $500,000 self-insured retention. Genesco also disclosed putative wage-and-hour class or collective actions involving a subsidiary and stated that it disputes the allegations and intends to defend them.
- Genesco repurchased 275,300 shares for $16.2 million during the quarter, with $24.0 million remaining under its $100.0 million authorization. The company stated its current intention is to keep foreign cash invested abroad; repatriation would entail U.S. taxes.
- The company identified fashion shifts, weaker mall traffic, consumer and retail-sector weakness, foreign exchange, and litigation and environmental outcomes as factors that could cause actual results to differ materially from forward-looking statements. It reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess whether comparable direct-sales growth can offset weaker store sales, particularly at Journeys, and whether fashion and mall-traffic pressures persist.
- Monitor gross-margin trends, promotional activity and expense leverage, especially the Lids operating loss and sharp declines in Journeys and Johnston & Murphy operating income.
- Track inventory, seasonal operating cash flow, capital spending and borrowing needs; verify the company’s stated credit availability and covenant headroom in subsequent filings.
- Review execution and returns on the planned store openings, renovations and Journeys warehouse expansion against the $135–$145 million capital-spending plan.
- Follow developments in wage-and-hour litigation and environmental matters, including the adequacy of accrued provisions and insurance recoveries.